Economic forces at work today seem to be favoring the consolidation of currencies. With the creation of the Euro, 11 disparate currencies were merged into one monetary unit. With such forces driving monetary consolidation, will there be one world currency some day? Some of the factors that are influencing currency combination include:
Because trade among nations is so vibrant and pervasive, it’s extremely important for countries to have confidence not only in their own currencies, but also in the currencies of the countries with which they trade. An erosion of confidence in a country’s currency can spread fear among other nations that have trade relationships with that country. It’s pretty obvious that a currency crisis in a particular area could possibly become some sort of currency pandemic.
Most of us probably remember the debacles that befell the currencies of Thailand, Mexico, Argentina, and Russia. At the time of the Mexican currency crisis, then President Clinton said: “Solving Mexico’s current troubles is important for the rest of Latin America and developing countries throughout the world.”
As I recall, our government was extremely proactive because it was concerned that the Mexican crisis would spread and affect other currencies in our hemisphere.
Countries in Debt
Additionally, countries that have lent heavily to other nations are naturally concerned about the possibility that the debt that is owed to them will depreciate in value because of a currency devaluation or crisis. They want to be assured that the debtor country will repay its loans with a currency that has not depreciated in value.
Currency stability is therefore a worldwide goal and concern.
Also, countries that already have had currency crises would benefit if their currencies were converted to a regional monetary unit. Their fears of future currency problems for their countries would be alleviated.
If we think about the difficulties facing multi-national companies that are trying to price their products and report their profits, all while dealing in various currencies, we might have an idea about the challenges facing them. There’s no doubt that the CFOs of multi-national companies would welcome some relief from their currency headaches. Some version of currency consolidation would certainly help to eliminate their pricing and reporting problems.
E-banking is another factor that lends itself to some sort of currency amalgamation. With this type of banking, funds routinely cross borders without going through traditional banking systems. Certainly, e-banking is here to stay, thus further contributing to the economic factors that favor currency consolidation.
If you haven’t heard of the term “currency zones,” you may be surprised to learn that they do exist. The major currency zones are the U.S., Euro, and Yen zones. The driving factors that have created these zones are local markets that thrive better economically if they are dealing with one regional currency. Thus, one market tends to create one currency zone.
Factors Against Currency Consolidation
Of course, we aren’t about to have one world currency tomorrow, or twenty years from now for that matter. My guess is that we will likely have currency zones for many decades to come. The reasons for this are political and economic. The one market/one currency zone concept evolved out of economic and political necessity. I don’t think there will be a sudden worldwide rush to bypass this concept.
Another factor that works against a worldwide currency is that each country would then lose its country-specific monetary policies. For example, if a particular country were plagued by inflation, its central bank would be inclined to raise interest rates to put a damper on growth. This would be practicable only if a country had its own currency, because monetary policies can be implemented only if the policies are applied to an underlying currency.
Therefore, it would be difficult for a country that was troubled by inflation to divorce its monetary policy from some sort of world bank that imposes its own monetary policies on its members. This begs questions about who will be in charge of the central bank and how much autonomy a particular country would have to give up.
Finally, nationalism is a major deterrent to currency consolidation.
Most of us identify with our nation’s currency and would object to using a currency imposed on us by an international agency. To many people, sovereignty equates to a country-specific currency.
Will we be looking at a one-world currency in our lifetime? I don’t think so. My best guess is that for the foreseeable future we will continue to have currency zones like the U.S. zone, the Yen zone, and the Euro zone.
However, based upon the growing prowess of the Chinese economy, I wouldn’t be surprised if an additional zone were created. The Chinese currency, the Yuan (also referred to as the Renminbi) could play a dominant factor as an alternative monetary unit in the Far East.
Of all the current monetary units, the U.S. dollar is still the world’s dominant currency. But, there are challenges facing the dollar. I talk about them and how they can be overcome in my article The Dollar’s Falling! Does It Really Matter? Though the dollar is somewhat challenged today, I’m not about to convert my dollars any time soon.
Theodore F. di Stefano is a founder and managing partner at Capital Source Partners, which deals in bringing small-cap companies public. He also is a frequent speaker on the subject of financial advice for small businesses as well as the IPO process. He can be contacted at Ted@capitalsourcepartners.com.